Wednesday, February 23, 2011

Carl Menger, Fountainhead

Carl Menger (1841 - 1921)
One hundred seventy years ago today, the great Austrian economist Carl Menger was born. Menger was, as Joseph T. Salerno called him, the founder of Austrian economics. He deserves this title because, with the publication of his seminal work, Principles of Economics, he set modern economic analysis firmly on a foundation of causal-realism, an approach most fully realized in the Austrian economic tradition.

Menger's modus operandi was to demonstrate that there are economic laws that are not merely hypothetical, but are indeed relevant for the real world in which we live. He emphasized the logical law of cause and effect and explicitly began his analysis with human action. Menger's method, therefore, was sharply distinct from other popular approaches of that time, such as the British Classical approach (which relied on fictitious postulates and arbitrarily constructed aggregates such as the price level, the capitalist class, landowners, and labourers, and an objective labor or cost of production theory of value) and the German Historicist Approach (which began with viewing economic phenomena such as prices as mere historical data without trying to explain them as resulting from more fundamental factors).

Menger, on the other hand used his causal-realist method to demonstrate that marginal value is of fundamental importance for explaining all economic phenomena. He also explained the distinction between consumer goods and producer goods, noting that the value of the producer goods is derived from the value of the goods they are used to produce. He also explained why inherent in the concept of economizing is the concept of property. Private property, consequently, is not an arbitrary invention, but a foundational category of human action.

Menger's legacy is one of profound impact. He heavily influenced Eugen von Bohm-Bawerk, who began with Menger's framework and developed it. His ideas then were most fully developed by Bohm-Bawerk's student Ludwig von Mises. Mises' lifetime project of developing economic theory culminated in the publication of Human Action which I began to read as a sophomore in college and made me want to be an economist. One could say that, in God's providence, because there was Carl Menger, there is Foundations of Economics.

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